Track. Share. Compare.

How to express value of defined benefit pension in terms of net worth?

I'm a year or two away from a defined-benefit pension from a very large and stable government employee retirement system. I know how much I've contributed since I started, but that really doesn't reflect the value of my eventual monthly pension from them. How do I calculate this as part of my net worth?

Answers

Personally, I don't think a pension should be part of your networth. You don't count your current salary as net worth do you? The way I understand it, a pension is like a portion of your salary after retirement.

However, if it is a retirement account like TSP or 401k, then record the value of the account into the retirement category.

Interesting question. I don't know what terms I'd necessarily think of it in. I don't think anyone considers Social Security as part of their net worth and that's essentially a defined benefit plan most folks pay into. Even an annuity, once you buy it, is tied to the pay out, not what you put in because you typically can't get that money back. So if I buy a $500K annuity would that money disappear from my net worth? Something to consider.

Personnally, I wouldn't consider the defined pension as part of my networth because it's not something I can directly sell or trade just like I couldn't sell or trade my future Social Security benefits (if any) or I can't sell or trade my salary. I could take loans out with the understanding that this income is coming in and pretty much guaranteed with the defined benefit pension, but I don't feel that's the same thing as having the account directly available to you.

Understandably if this is a major portion of your retirement, compared to others who might have a million or more in their IRA funds, your networth might not look that great. If you really want to consider it in comparison to others who have IRAs, I guess you could look at it as what would you have to have in an IRA to generate the kind of payout you're expecting from the pension. So as a general idea multiply the annual payout by 25 to see how much most advisors would recommend you have in the IRA. For example:

$40K times 25 = $1,000,000

So if you were getting $40K per year you could add $1M to your theoretical net worth. If you aren't worried about maintaining pricipal, you could just multiply the payout by average life expectancy, e.g. retire at 65, die at 85, twenty years times $40K yields $800,000.

I have a pension as well, and I count it as part of my net worth but I value it as an annuity. I don't count SS as part of my retirement because I don't believe that it will actually exist by the time I retire. I have more confidence in my company.

I created a spreadsheet to make the calculations using present & future value functions; send me a message if you'd like a copy.

I originally counted my defined contribution pension but then most of the articles I read stated net worth should be wealth accumulated. Of course, we paid in quite a bit during our employment but in a sense the payout is related to other things.

I took it out but when I did count it I used an annuity calculator and put that figure in.

Why would you treat defined-benefit contributions any differently from any other investment when calculating your net worth? I disagree with the posters above and think that the money accumulated in your pension account should be included in your net worth. After all, it's money you have vested. When you begin to receive payments in the form of income, just track the deposits as a transfer from your pension into your checking (or savings) account.

BTW, the conventional wisdom is that you should multiply your annual pension payout by 15 to calculate the total value of the pension. This helps in understanding your true portfolio allocation and how much "less" needs to be saved for retirement. We do this and consider our pensions as fixed-income investments.

I am in a DB Plan here at work and I do value it as part of my net worth, but only in a conservative light. Our HR department (as part of their employee info packages) provides a formula that allows us to calculate what we would be paid out if we were to leave the company. In my company for example, it is as follows: Annual Salary x 1% x years of service x a factor dependant on your age (my age of 37 equals a factor of "3" on our table). So for me it is $115K x 1% x 10 x 3 = $34.5K

That's one way of doing it - you may want to see what the formula is for your company.

Thanks for all the thoughtful responses. I was trying to cheer myself up about our NW as I watched our port take hit after hit. My husband and I can probably meet most of our retirement needs from his military retired pay and my pension. That gives us a lot of time for our portfolio to recover.

I'm kind of inclined to go with Kimbopolo's answer. Our formula is 2 percent at age 55 and I have 26 years of service plus a year of sick leave that gets annuitized. I'm vested, so if I walked out the door today, I'd get around $65,000. That's nearly a million using Kimbopolo's formula.

I include both of our defined benefit pensions as an annuity on our profile. For the amount entered, I just use the "total contribution balance" from our annual statements. This amount would be cashed out if we left our jobs prior to retirement.

You should calculate pension plans as part of your networth. However, you will need actuarial factors to caculate this (BTW: I'm an actuary).

For example, if your yearly pension is $1 and you are now retirement age of 65, then the present value of your pension is based on: 1 x 15, the 15 represents approximately how many year you will be paid out based on life expectancy and discount rate.

Personally, I don't include my defined benefit pension in my current net worth. However, the value of a 401(k) would be included. While this seems inconsistent, there is one critical difference. If I die tomorrow, my defined benefit pension would be worth nothing to my heirs, while they would receive the amount in a 401(k). This is not absolute, since there may be a survivor option with a defined benefit pension. However, I just wanted to make a point about the differences.